Primary market open; Targa down slightly; Pacific Gas & Electric tanks; Albertsons gains

By Paul A. Harris and Abigail W. Adams

Portland, Me., Jan. 14 – While the high-yield primary market was again quiet on Monday, it showed signs of returning to life with the first deal of the year pricing last Thursday and a forward calendar beginning to form.

Targa Resources Partners LP and Targa Resources Finance Corp. brought the first issuer of 2019, pricing $1.5 billion in senior notes over two tranches.

With the deal in hot demand during bookbuilding and trading sharply higher in the secondary space, other issuers may soon step forward, sources said.

Senior notes offerings from Dun & Bradstreet Corp. and Energizer Holdings Inc. are expected to surface by late January/early February and opportunistic issuers may be waiting for a firm day to launch.

Meanwhile, Targa’s new paper remained active in the secondary space although the notes were coming in slightly from their highs on Friday.

Pacific Gas & Electric Co.’s senior notes continued to dominate the space with the notes trading sharply lower on Monday after the company announced it would file for Chapter 11 bankruptcy and would miss the interest payment on its 5.4% senior notes due January 2040.

Albertsons LLC’s 5¾% senior notes due 2025 were making gains after the food and drug retailer reported third-quarter earnings.

Market open at a price

The primary market, having cleared 2019's first deal on Thursday, Jan. 10, spent its second consecutive day on the sidelines in the wake of that trade, sources said on Monday.

The Targa Resources Partners deal, which came as a drive-by last Thursday, seemed to demonstrate that the primary market is open at a price, a debt capital markets banker remarked on Monday. The company paid a concession of 62.5 basis points to 100 bps across both tranches to get the deal done, the banker said.

However, in the wake of the Targa trade, market sources have reflected on the deal in a positive light.

The recap – Targa became the first issuer to price a deal in five week, as well as the first issuer in 2019, when it priced an upsized $1.5 billion amount of senior notes (Ba3/BB) in two tranches.

The bonds in both tranches were trading at decent or better premiums to new issue prices on Monday morning.

The 6½% notes due July 2027 were seen at 101¼, 101¾ offered, and the 6 7/8% notes due January 2029 at 101¾ bid, 102¼ offered.

Both tranches priced at par.

Demand was huge and allocations were dear, an investor told Prospect News.

All told the $1.5 billion deal played to $8 billion of demand from more than 240 accounts.

Opportunistic financings such as Targa are poised to come, the syndicate banker said, but added that on a day such as Monday, with the U.S. stock indexes set to open lower, an opportunistic issuer will almost certainly elect to wait for a more supportive capital markets backdrop.

Opportunistic deals aside, there is a slight but building pipeline of committed financing deals in which the issuer and the dealers have more motivation to come than is the case with their opportunistic counterparts.

That pipeline is known to include Dun & Bradstreet Corp., which is expected to bring $850 million of senior notes as part of a financing that also includes $3.53 billion of bank debt set to launch in late January or early February.

And Energizer Holdings is expected to bring $600 million senior notes in the same timeframe.

Meanwhile, the euro-denominated high-yield market is unlikely to get up and running before some clarity exists on the Brexit situation, a London-based syndicate official said on Monday.

British Prime Minister Theresa May's plan for the United Kingdom to leave the European Union comes up for a vote in Parliament on Tuesday, with political pundits professing expectations that the plan will fail to pass.

However, meaningful political direction in the matter could be forestalled further, the banker suggested.

Targa down slightly

New paper from Targa remained active in the secondary space although the notes were coming in slightly from their highs on Friday.

Targa’s 6½% senior notes due 2027 were trading in a range of 101 3/8 to 101½ during Monday’s session, a market source said.

More than $27 million of the bonds were on the tape by the late afternoon. The notes traded as high as 102 3/8 on Friday but closed the day around 101 5/8.

Targa’s 6 7/8% senior notes due 2029 were trading between 101 7/8 and 102 on Monday. More than $21 million of the bonds changed hands during Monday’s session.

The notes traded as high as 102 5/8 on Friday but closed the day around 102.

PG&E tanks

Pacific Gas & Electric’s junk bonds continued to dominate the secondary space on Monday with the notes trading sharply lower after the company announced its intention to file for Chapter 11 bankruptcy and announced it would miss the interest payment on its 5.4% senior notes due 2040.

The 5.4% senior notes dropped 3¾ point to trade down to 79½. More than $37 million of the bonds were on the tape by the late afternoon.

The 6.05% senior notes due 2034 continued to be the most active out of the capital structure. The notes dropped 7¼ point to 80 5/8, a market source said.

More than $228 million of the bonds were on the tape by the late afternoon.

The 3½% senior notes due 2020 dropped 9¼ point to 80½ with more than $65 million of the bonds trading hands.

The entire capital structure was down between 1 and 10 points on Monday with the higher dollar-price bonds falling the furthest, a market source said.

Pacific Gas & Electric announced that it would file for Chapter 11 bankruptcy on or around Jan. 29 due to “extraordinary challenges” related to the California wildfires of 2017 and 2018.

The bankruptcy filing was determined to be “the only viable option to restore PG&E’s financial stability to fund ongoing operations,” the company said in a news release.

The company had $400 million and $1.1 billion cash and cash equivalents on hand as of Jan. 11, and does not intend to make the $21.6 million interest payment due on the 5.4% notes on Jan. 15, giving the company a 30-day grace period before triggering a default.

Pacific Gas & Electric’s senior notes have dominated activity in the secondary space since last Tuesday when S&P downgraded the company to junk.

Moody’s Investors Service followed suit later in the week.

While the notes traded down after achieving junk status on Tuesday, they were on the rebound on Wednesday and mixed in high-volume trading for the remainder of the week.

Albertsons’ earnings

Albertsons’ 5¾% senior notes due 2025 were making gains in active trading on Monday after the grocery and drug store chain released third-quarter earnings.

The 5¾% notes rose about ½ point to 92½, according to a market source. More than $20 million of the bonds were on the tape by the late afternoon.

Albertsons reported a 1.8% increase in sales and revenue, a gross profit margin increase of 27.8% and an increase in adjusted EBITDA of over 50% year-over year in the third quarter, according to a company news release.

Adjusted EBITDA was $649.7 million in the third quarter versus $429 million in the third-quarter of 2017.

Friday inflows

The technical picture of the junk bond market, an indicator of the cash looking for a home in the asset class, turned dramatically with the new year, a trader said on Monday.

The dedicated junk bond funds which bled a massive $21.7 billion in net outflows during the fourth quarter of 2018, have seen $891 million of net inflows in 2019 to Friday's close, the trader said.

The afterburners came on Friday, with the combined funds seeing $1.96 billion of inflows on the day, which breaks down to $607 million of inflows to the junk ETFs and $1.35 billion into the actively managed funds.

For the five-session reporting period that began with the Thursday, Jan. 10 opening and will conclude with this coming Wednesday's close, the combined funds are tracking $3.38 billion of inflows to Friday's close, the trader said.

Those flows serve as an indicator that there is cash looking to be put to work in junk, historically a key factor in driving a new deal calendar, sources say.

Indexes flat to down

Indexes were flat to down on Monday after all posted large gains on the week last week.

The KDP High Yield Daily index was up 1 basis point to close Monday at 68.61 with the yield now 6.56%. The index saw a cumulative gain of 116 bps on the week last week.

The ICE BofAML US High Yield index dropped 17.1 bps with the year-to-date return now 3.031%. The index saw a cumulative gain of 190.8 bps on the week last week.

After closing 2018 with a year-to-date return of negative 2.265%, the index catapulted past 3% returns in the first two weeks of 2019.

The CDX High Yield 30 index dropped 42 bps to close Monday at 103.48. The index saw a cumulative gain of 110 bps on the week last week.

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